Rising Wages for Nurses? Nanny State to the Rescue

The New York Times had an article today that inadvertently revealed a huge amount about how wages are set in the US economy (“US Plan to Lure Nurses May Hurt Poor Nations,” 5-24-06; A1). We all know the official story – wages are supposed to be set by the market, our old friends supply and demand. When certain skills are in short supply, the wages for workers with these skills are bid up. This leads more people to acquire the skills and may also reduce the demand. Eventually, supply increases and demand falls by enough to establish a balance in the market.

In this wonderful market world, the people who end up with high wages (e.g. doctors, lawyers, accountants, economists) have skills that are in high demand and difficult to master. The people with low pay (e.g. custodians, retail clerks, child care workers, dishwashers, etc.) are ones who have skills that are relatively plentiful.

That is a nice fairy tale. It has about as much relationship to the real world as the tooth fairy, as the Times article showed.

The article reports on a provision in the Senate immigration bill that removes the cap on the number of nurses who can enter the country each year. The problem, as described in the article, is that the country faces a large and growing shortage of nurses. In a market economy, a shortage means that wages should rise. This will cause more students to enter nursing schools (presumably creating more incentive to establish nursing schools), and will induce many part-time or retired nurses to work more hours as nurses. It may also curtail the demand somewhat, as some tasks that are performed by nurses can presumably be performed by less-skilled workers.

But, that is not the way things work in the world of the conservative nanny state. The people who set economic policy in this country don’t want to pay nurses higher wages. They have a different solution – bring more nurses from developing countries into the United States. These nurses will be very happy to work for the current wages received by nurses in the United States, which are far higher than what nurses in places like the Philippines or India earn. (Never mind the impact that this drain of nurses has on developing countries.)

Before anyone claims that free immigration is part of a free market, it is important to remember that the United States does not have free immigration in general, it only allows free immigration in occupations where it is trying to depress wages. While it is far cheaper to educate nurses in developing countries than in the United States, it is also far cheaper to educate doctors, lawyers, accountants and economists. The gains from having free immigration for people working in these professions would be enormous. We could even share these gains by reimbursing the countries of origin.

This would be an enormous win-win scenario. By making our education and licensing requirements fully transparent and opening the door to foreigners in the most highly paid professions, we would be able to drastically reduce the cost of health care, college education and many other goods and services. This would mean higher living standards and more jobs for people in the United States. This is the gains-from-trade story that economists like to tell in other contexts. We could share these gains with developing countries, paying them 3 or 4 times the costs of educating these professionals, so that they can educate more professionals for their own countries, and also redistribute some of this income.

Incidentally, this form of free trade would also lead to a more equal distribution of income, improving the situation of those at the middle and the bottom and the expense of those at the top. Of course this is the reason why Congress is not about to remove the barriers that protect our highly paid professionals from foreign competition.

The key to the story is that our political leaders think that free trade and competition are good only for manufacturing workers, nurses, and other workers lower down the social ladder. They want the nanny state to protect the highest-paid workers from international competition. The huge gap in wages between those at the top and those at the bottom is not because of the market, it’s because those at the top got Congress to rig the game.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. It can be found at the CEPR website, www.cepr.net.